Its good for the Chinese, but not for us. Why?

"New York: The currency war has arrived," wrote K Greifeld. According to the Bank of International Settlements (BIS) the daily foreign currency transactions total a whopping $5 trillion per day. However, the global settlement bank CLS puts the figure at $3 trillion per day. The Chinese yuan fell to 6.80 to the dollar which earned a warning from President Donald Trump about currency manipulation and keeping interest rate too low. "There's no question that the weakening of currency creates an unfair advantage for them," said Treasury Secretary Steven Mnuchin. "We are going to carefully review whether they have manipulated the currency." A lower exchange rate helps exports by making goods and services cheaper, giving an advantage against a stronger currency. The Indian rupee has also been falling this year. Urjit Patel, Governor of the Reserve Bank, warned against a rapid correction of monetary policy by the Federal Reserve in the US. After the subprime crisis in 2008 the Federal Reserve resorted to buying US government bonds, known as quantitative easing, to inject around $4.5 trillion worth of liquidity into the system to bring down interest rates and the dollar. Since last year the Fed has been selling bonds to reduce its balance sheet and also increasing interest rates. Patel is worried about a "double whammy" of reducing balance sheet with increased US government borrowing to fund its tax cuts. "The upheaval stems from the coincidence of two significant events: the Fed's long-awaited moves to trim its balance sheet and a substantial increase in issuing US Treasuries to pay for tax cuts," he wrote. "Dollar funding has evaporated, notably from sovereign debt markets. Emerging markets have witnessed a sharp reversal of foreign capital flows over the past six weeks, often exceeding $5 billion a week. As a result, emerging market bonds and currencies have fallen in value." Why is China deliberately depreciating its currency to gain an advantage in trade while the governor of India's central bank is worried about the fall in our currency? Because China exported over $2 trillion worth of goods and services in 2016, India exported a meager $274.65 billion in 2016-17. We import parts to produce goods for exports so when the rupee falls our cost of production goes up, wrote N Kwatra. "Between 2012 and 2018, India's share of US imports rose marginally from 6.5% to 7.5% while those of Vietnam rose from 7% to around 12%...... During the same period, the rupee fell around 30% against the dollar while the Vietnamese dong depreciated by just 10%." Why? Because, "the real effective exchange rate (REER) has risen for India gradually since 2000 and accelerated post 2013 even as rupee depreciated against the dollar in nominal terms." The rupee has been getting stronger against other currencies which is why we cannot compete against other countries. A strong rupee is used to control inflation. But, that is another story.